The National Pensions Savings Scheme (Npss) should be implemented into a culture where opting out is actively discouraged, claims former pensions minister John Denham MP.
Speaking in a political debate at the National Association of Pension Funds (NAPF) annual conference, alongside David Laws MP and Phillip Hammond MP, Denham warned the “best should not become the enemy of the good”.
He says if people are given individual financial advice on the 3% level of contributions and whether it is in their best interests the new scheme will have the highest number of opt-outs, leaving the UK with its least useful system.
Instead, Denham suggests the government and industry should encourage a culture where opting out of the scheme is actively discouraged, arguing it shouldn’t “give too much ground to people who promote the complexity and advice type issues”.
However Hammond, shadow work and pensions secretary for the Conservatives, his companion on the panel, claims this is a “rough justice” approach which makes people save whether it’s in their best interests or not, and while high opt-out numbers would mean the scheme would not succeed, he says he is “rather nervous” of adopting such an approach.
He says: “This idea would see people who have saved all their lives only marginally better off than if they’d never saved at all because of means-testing. But this is an area where there is still a large amount of work to do.”
Laws, the shadow work and pensions secretary for the Liberal Democrats, agrees there is a challenge in getting people to stay in such a scheme but suggests an improvement in financial literacy would be a more beneficial route than stopping opting-out advice.
He says as means-testing is still going to play a fundamental part in the state system, one in four people are going to have to make the decision whether or not to stay in the Npss.
Laws points out the government has done its best to provide an incentive with matching employer contributions, but he warns these will effectively be wiped out by means-testing, which could have a massive impact on the willingness of people to engage with the idea of joining the scheme.
The problem with the potential levels of opting out, according to Laws, is the huge transfer of risk from employers to individuals who have very low level of financial awareness, as there is widespread financial illiteracy which is not being tackled in the education system.
As a result, Laws argues: “It is a big challenge to get people to stay in the scheme and we will have to do a whole series of things to encourage this, most importantly through tackling and reducing means-testing and by tackling financial illiteracy.”
Meanwhile, all three representatives of the main political parties are in agreement an independent body to review the pensions reforms would be a good idea, despite being categorically rejected by John Hutton, secretary of state for work and pensions, on the grounds it would just be “another quango which would have nothing to do for the next 20 years”.
However, Denham warned it may be one thing Hutton might regret as there is in this case a need for a body to review the changes to make sure they are delivering what is expected.
He says: “We don’t need it for the next two or three years but in 10 years time when the changes have started to come into effect and things may have started to go wrong, it might be useful to have a body to get us back on track.”
Hammond agrees it is essential there are regular reviews to make sure the intended consequences of the reforms actually occur, although he suggests the question is whether it is a standing body or a series of reviews at periodic intervals, which seems to be the government’s thinking at the moment.
Laws also supports the idea of some kind of independent body pointing out while governments don’t like contracting out power, in some cases there are benefits to the move, as in the case of the Bank of England's Monetary Policy Committee which is regarded to be highly successful.
He adds: “Would we have the consensus we have today without the Turner Commission? I doubt it. We’ve moved an extremely long way because it was an independent review. I regret the government has rejected the idea, but I hope it is put back on the table as we move forward from the white paper.”
If you have any comments you would like to add to this story or would like to speak to its author about a similar subject, telephone Nyree Stewart on 020 7968 4558 or email [email protected].IFAonline
Despite improved risk appetite
FOS award limit increase
Relates to 136 million transaction reports
Ceremony will take place 13 November